Aug. 07, 2023 6:21 AM ET Amazon.com, Inc. (AMZN)
- Amazon reported better-than-expected earnings for Q2, driven by a strong performance in the North American e-Commerce segment.
- Operating income for Amazon's NA e-Commerce segment improved drastically which is good news for Amazon. NA e-Commerce grew almost as quickly as AWS in Q2'23.
- Amazon issued a strong outlook for Q3, implying the possibility of a consecutive revenue acceleration.
- While the firm's operating income picture has improved as well, I see limited upside as AMZN trades at a near-50X P/E ratio.
Amazon: Growth Assessment and Rating Upgrade
In this article, the author provides an analysis of Amazon.com, Inc. (AMZN) based on its Q2 earnings report and performance. The analysis includes a review of the company's revenue and earnings, the performance of its North American e-Commerce segment, its Amazon Web Services (AWS) segment, and an assessment of its valuation. The author then decides to upgrade the stock's rating based on the improved operating income situation in the e-Commerce segment and strong Q3 guidance.
- Previous Rating and Reasons for Rating Change: The author previously rated Amazon as a "Sell" due to slowing top-line growth and weak operating income trends. However, the improved operating income situation has led to a rating upgrade to "Hold."
- Amazon's Q2 Earnings: Amazon reported better-than-expected Q2 earnings, beating revenue and earnings estimates. Revenues were $134.4 billion, exceeding estimates by over $3 billion, and adjusted earnings were $0.65 per share, surpassing estimates by $0.31 per share.
- Improvement in North American e-Commerce: The North American e-Commerce segment exhibited strong performance, with revenues growing 11% YoY to $82.5 billion. The improvement was driven by a strong economy and consumer spending, leading to sequential acceleration of net sales.
- Operating Income Improvement: Amazon's North American e-Commerce segment's operating income improved significantly, posting $3.2 billion in Q2'23 compared to a loss of $627 million in the same period last year. The operating income for this segment has improved drastically, contributing to the author's rating upgrade.
- AWS Growth Slowdown: While AWS remained profitable, its revenue growth rate slowed to 12% YoY, compared to 11% growth in the North American e-Commerce segment. The author notes a persistent slowdown in AWS growth, which limits Amazon's upside potential.
- Q3 Outlook: Amazon issued a strong outlook for Q3, suggesting the possibility of consecutive revenue acceleration. This optimistic guidance was supported by strong Prime Day sales in July.
- Valuation and Rating Upgrade: Despite the improved operating income situation, Amazon's valuation remains high, with a forward P/E ratio of 48.6X. Due to this valuation and ongoing headwinds in AWS growth, the author upgrades Amazon's rating to "Hold."
The author acknowledges that their previous doubts about Amazon's operating income potential were proven wrong, particularly in the North American e-Commerce segment. The improved operating income picture and strong Q3 guidance have led to the rating upgrade to "Hold." However, the author remains cautious about ongoing AWS growth slowdown and the company's high valuation, suggesting that shares are at best a "Hold."
